Friday, October 12, 2012

Industry Groups Ask Federal Court to Strike Down SEC Resource Extraction Disclosure Regulation

A consortium of industry groups led by the US Chamber of Commerce has asked a federal court to strike down the recently-adopted SEC regulation implementing Section 1504 of the Dodd-Frank Act by requiring resource extraction companies engaged in the development of oil and natural gas to disclose payments made to the federal government or foreign governments. The groups have asked the DC Circuit Court of Appeals to void and vacate the regulation as arbitrary and capricious and not on accordance with the Administrative Procedure Act or the Securities and Exchange Act. They also ask for a permanent injunction prohibiting the SEC from enforcing the rule. Out of an abundance of caution, the industry groups have also filed a complain setting forth their claims in the US District Court for the District of Columbia. The counsel of record is Eugene Scalia of the Gibson Dunn & Crutcher firm. American Petroleum Institute and US Chamber of Commerce, et al. v. CFTC, Civil Action No. 12-1668.

The industry groups allege that the SEC selectively ignored its statutory duty to conduct a meaningful cost-benefit analysis and misinterpreted its duty to make a compilation of information available to the public. They also maintain that the regulation is incompatible with the First Amendment.

The district court complaint states that by the Commission’s own reckoning the rule will cost U.S. public companies at least $1 billion in initial compliance costs and $200 to $400 million in ongoing compliance costs, and could add billions of dollars of additional costs through the loss of trade secrets and business opportunities. While the Commission did not quantify how many billions of dollars more the rule might cost U.S. companies, it acknowledged that US companies may be forced to sell their assets in the host countries at fire sale prices or else keep existing assets idle and not use them in other projects.

The SEC did not include an exemption when foreign law prohibits disclosure. In calculating the competitive costs associated with the potential for lost business in countries that prohibit the required disclosures, noted the complaint, the Commission did not determine how many countries had laws on the books prohibiting disclosure. Rather, it merely stated that commenters’ concerns regarding lost business appear warranted and that host country laws could add billions of dollars of costs to affected issuers. The industry groups claim that the misreading of Sec. 1504 of Dodd-Frank exacerbated the infringement of First Amendment interests caused by the statute itself. Section 1504 forces US public companies to engage in speech that they do not wish to make, said the complaint, in violation of their contractual commitments.